Differences between the Joint Venture and Strategic Alliance - Coursework Example

International Joint Venture Name Institution Course Date International Joint Venture Introduction The emergence of globalisation has had a huge impact on how companies operate (Chetty and Campbell, 2003). Rapid technological advancement, widespread changes as well as emerging markets have led to a significant level of acquisition and other collaborative activities with the aim of attaining sustainable competitive advantage. In order to enter into new markets, firms require entry strategies such as exporting, licencing, direct investments and mergers and acquisition (Cullen and Parboteeah, 2010). Companies participate in international business for a number of reasons such as to acquire growth and expansion, to serve a large market, to gain competitive advantage, to gain better-value factors of production and to develop economies of scale among others (Chetty and Campbell, 2003). With globalization and liberalization, it is not difficult for companies to enter into new markets. The expansion of companies into international markets can be found to be beneficial for the foreign company and to the domestic market (Chetty and Campbell, 2003). The idea of internalization by foreign companies sound promising for both the company and the new market but it is not as easy as it sounds. An important step in entering foreign market is to select the mode of entry. More and more companies today choose to access new markets using strategic alliance and joint venture. The two entry strategies are based on mutually-beneficial relationships which is able to boost a company’s competitive advantage over the competitors (Chi and McGuire, 2006). However, there are some situations that favour one from the other. This paper will discuss the differences between an international joint venture company and strategic alliance. It will also highlight the strengths and weaknesses of each with regard to achieving strategic objectives. In addition, the essay will discuss the situations that would favour one strategy from the other. Differences between Joint Venture and Strategic Alliance A strategic alliance is a relationship established between two or more companies with the aim of achieving specific strategic goals and objectives (Ben et al., 2002). The twist however is that the strategic partners often uphold their current status as independent entities; there is no new business that is formed. When two or more businesses want to quickly gain expertise or access new technology, they may opt to form a strategic alliance where they are able to share the benefits, control the partnership and contribute before termination (Ben et al., 2002). Strategic alliances are often formed between companies found in different parts of the world. Strategic alliances are very important in organisations as they provide a valuable and effective means of carrying out business co-operatively without autonomy. For a strategic alliance to occur, two or more organisations set out an agreement to operate together on a particular project or share productive resources and information (Das, 2011). Strategic alliance may be between a supplier and a purchaser or it can also be between two non-identical companies that operate in different industries and have different vertical supply chain. On the other hand, international joint venture is the collaboration of two or more partners from different jurisdictions with an aim of exchanging resources, divide profits and share risks (Ben et al., 2002). However, international joint venture company is formed when two companies invest capital in creating a new business that is jointly owned. Generally, joint venture is a form of partnership where there is a creation of a third independently managed company. It involves two companies agreeing to work together by creating a third company that operate in a particular market (Gomes et al., 2011). The new jointly-owned company has the capacity to access assets, technology and capital from the companies without altering their operations. Joint venture is an on-going business that operates independently but the profits generated from it are shared between the parent companies (Gomes et al., 2011). In Addition, another difference between strategic alliance and joint venture is that joint venture is contractual while strategic alliance may or may not be contractual (Gomes et al., 2011). Strategic partners may choose to use contract as an agreement binding element. Joint venture business requires a contract between parties involved in order to operate (Prescott, Darrell and Salli, 2010). Also, in joint venture, the significant matters regarding operations and financial policy are prearranged and are under the ownership of the joint venture. However, strategic alliance, important matters regarding financial and operating policy are under the ownership of the individual participants (Rammer and Schiemiele, 2008). Additionally, joint venture is formed to exist for a specific period of time while strategic alliance is considered to having an indefinite life or specific period of time. This is because, joint venture is created for a specific project or purpose and after the completion of the project it is terminated indefinitely (McDougall, Oviatt and Shrader, 2003). Analysis of Merits and Demerits of Strategic Alliance and Joint Venture A strategic alliance ensures that companies pursue their set objectives but still remaining independent organisations. In forming a strategic alliance, there is no need to have a contract or agreements bounded by law (Luo and Tung, 2007). Strategic alliances are considered a way of testing the waters before embarking on a full-scale merge due to ease of setting up. Also, it is easy to start since there are no ownership changes. It is usually easier to get in or out as a result of lack of combined legal structure. As a result of being quicker and easy to set-up, it is possible to get results quicker compared to joint venture (Luo and Tung, 2007). On the other hand, since the formation of a joint venture requires contract and has many legal obligations, it takes time to set-up. It involves the creation of a new entity which requires a lot of commitment and legal considerations such as liability sharing and insurance, rights, duties and restrictions, ownership of intellectual properties and country laws and regulations (Kumar and Singh, 2008). As a result of many considerations, joint venture may take a longer time to yield positive results. Some of the reasons why strategic alliances and joint ventures get dissolved include the inability of partners to work together, a shift in strategy due to environmental changes, and lack of required structures or resources (Kumar and Singh, 2008). However, the methods used to dissolve strategic alliance are different from that of joint venture. It is considered easier to dissolve strategic alliance that terminating joint venture. Since there is no legal structure in place, there are only few steps required for successful dissolution. There are two major activities for successfully dissolving an alliance; engaging relevant stakeholders and using the alliance agreement as a guide (Hill, 2007). However, unlike strategic alliance, joint venture is bound by legal laws and regulations. The dissolution of joint venture is regulated by partnership law. It is expected to follow the written agreement between the parties involved. As a result of it being legally bound, dissolution process becomes lengthy and difficult (Kale and Singh, 2009). A strategic alliance is basically less involving and requires less up-front investment as parties typically pool resources together to form a partnership (Kale and Singh, 2009). Strategic partners help to lower cost and due to few legal restrictions, it is set-up by minimal resources and investment compared to joint venture. Strategic alliances summons the core advantages and disadvantages of another company in order to add value, there are no major changes made in the organisations (Kale and Singh, 2009). However, international joint venture involves the blending of cultures and creation of new corporate culture. This is involving and may require factors such as training of employees and managers which is expensive. In addition, joint venture requires the opening of a new company that may be draining to resources and capital. It therefore requires huge amount of up-front investment and resources (Vaidya, 2009). A strategic alliance is considered informal partnership between different companies (Kale and Singh, 2009). It allows companies to achieve its goals and objectives while maintaining high level of flexibility to adapt rapidly by switching and replacing partners when a need arises or as appropriate. A strategic alliance might act as a trial partnership which determined whether the partners can commit. Its development and termination is easy and can take place at any appropriate time if need be Kale and Singh, 2009). A joint venture company on the other hand can also be flexible. An international joint venture company can have a short life span depending on the nature of the project undertaken which often limits the commitment of parties Kale and Singh, 2009). Due to the requirement of a contract, an international joint venture necessitates formal allocation of roles, responsibilities and commitment of the parties involved Kale and Singh, 2009). As a result of this, international joint ventures often have better coordination compared to strategic alliances. In addition, unlike strategic alliance, the objective and goals of international joint venture are always clear and are communicated to every party involved (Das, 2011). Coordination is very important in any partnership agreement since it allows the parties to be more responsive and adaptable to any internal or external chances. Strategic alliance lack formal allocation of roles which often affects its operation (Das, 2011). Unlike strategic alliance, international joint venture has a clear purpose which ensures the parties uphold trust and honesty (Das, 2011). Without some level of trust and honesty, it is difficult for a partnership to succeed. The priorities and expectations of IJV are clearly stated which tends to solidify the relationship between parties. Each party has the responsibility of ensuring successful business (Cullen and Parboteeah, 2010). This puts pressure on how companies act and increases their commitment to ensuring successful international joint venture. A clear purpose minimizes partner disputes due to predetermined direction of the business (Das, 2011). Strategic alliance does not have a clear purpose due to lack of written legal partnership agreement that leaves door for disputes between partners. Cultural differences determine the success or failure of a business (Ferraro, 2010). Establishing an international joint venture eliminates the risk of discrimination. For instance, in some countries, consumers prefer to buy products or services from local companies rather than a foreign one (Meirovich, 2010). The presence of a local company in a joint venture is able to improve products’ acceptance level to the locals. The help of a local partner also offer an advantage to the foreign company to easily adapt to the local culture and local employees. Strategic alliance also enjoys such benefit in the international market (Meirovich, 2010). Although strategic alliance and international joint venture enjoy many benefits, there are some disadvantages they possess (Stuat, 2000). For instance, it is easier to lose focus in strategic alliances which is often driven by senior executives. Focus and commitment is important to successfully establish an effective partnership as it discourages partners from taking other opportunities that might be damaging to the partnership (Stuat, 2000). However, in strategic alliance, partners may not be committed due to the risk of intensive information sharing and of losing control. As a result, companies may put all their focus on their individual operations and forget about the activities and responsibility they have to the strategic partnership (Gomes et al., 2011). Unlike strategic alliance, joint venture is a new entity that ensures full focus from different partners. In addition, as mentioned earlier, strategic alliance does not have a legal contract. It is only bound by the agreements stated by the parties (Gomes et al., 2011). And due to this, partnership can become messy leading to serious dispute. For instance, there may result to uneven alliance. When power is distributed unevenly between partners, the weaker one is often forced to do whatever the powerful partner want even if he or she is unwilling to do so (Gomes et al., 2011). This can become frustrating to some partners and may result to huge conflict. Also, strategic alliances lack conflict resolution agreements bounded by law. When a dispute emerges, it is likely to escalate as it becomes difficult to solve given different views of different partners (Kale and Singh, 2009). In addition, in strategic alliances, there is frequent and serious dispute as a result of informal corporation settings due to lack of formal agreement which causes highly costly dispute resolution. With availability of a legal contract, international joint venture company faces few disputes and conflicts (Kale and Singh, 2009). It is easy to solve dispute in joint venture due to availability of stated and agreed conflict mitigation strategies. Agreement of who does what is often not well thought through in strategic alliances. The strategic partners are the ones who determine their mutual desired outcomes and create a collaborative agreement that suits them (Kale and Singh, 2009). However, the agreement crafted does not always include every detail of the partnership and the roles of partners are often unclear. According to Kumar and Singh (2008), lack of commitment and thorough arrangement and planning leads to weak partnership foundation. It is therefore very essential for partners to agree on the goals, objectives and expectations and to agree on the responsibility of each party in order for a partnership to be successfully solidified (Das, 2011). The informality of strategic alliance makes it less serious compared to joint venture which can affect the foundation built by the partners. Moreover, international joint venture has numerous upheavals with regards to relocation. In order for any company to carry out its operations successfully in international countries, it requires the help of expatriates (Akmal and Ghauri, 2000). Managers and senior executives are required to relocate to a new country to ensure better management. Moving in a new culture is difficult for managers and may result to cultural shock. Expatriates are expected to incorporate culture of the company with the culture of the international market (Ferraro, 2010). In order for expatriates to succeed internationally, they should undergo some training. Expatiates may undergo cross-cultural training. Without cross-cultural training, expatriates will pass judgement on other cultures outside their own. They will not be able to understand why host culture people behave the way they do. Relocation plans is also considered expensive for foreign companies (Kale and Singh, 2009). A company must prepare to negotiate a compensation package with a manager before sending them overseas. Expatriation is considered an expensive strategy and thus companies must first evaluate the benefits of using expatriates. In strategic alliances, there may be no reason for allocation since companies often retain their structure and control (Kale and Singh, 2009). Several entry strategies are faced with cultural issues. However, the most affected is IJV. International joint venture involves the coming together of a local company and a foreign one. When two companies from different countries come together, cultural challenges are bound to happen (Bamford, Ernest and Fubini, 2004). Cultural factors often act as barriers to effective operation of international Joint companies. Many challenges result when people from different races, cultures and values come together in a work setting. International joint venture creates an opportunity where different people from different cultures come together. Communicating across cultures is considered a difficult task (Bamford, Ernest and Fubini, 2004). People from different cultures regularly communicate in a manner that brings misunderstanding and conflict. International joint venture involves multicultural teams. Working in multicultural team may bring about many issues such as disagreements and conflicts that can affect the performance of a foreign venture (Bamford, Ernest and Fubini, 2004). Cultural issues in international joint ventures are brought about by scant cultural knowledge as well as lack of cross-cultural communication skills among the managers. In addition, despite the advantages that come with international joint venture, there are many challenges that come into play when managing IJVs (Berell, Gloet and Wright, 2002). For instance, local partners often play a fundamental role in determining the success or failure of a venture. Research in international joint ventures in China suggests that the traits of the local partner are directly linked to joint venture success (Tian, 2007). The foreign manager and local managers need to coordinate and cooperate together which means that there is less management freedom. Different companies have different management styles and organisational culture (Tian, 2007). Forming an international joint venture requires the integration of different management styles which can lead to disputes between foreign and local managers. One huge difference between international joint venture and strategic alliance is the fact that strategic alliance lack legal consideration due to lack of legal contract (Bamford, Ernest and Fubini, 2004). Putting up a new separate entity requires a complex legal model especially if it is an international venture. Therefore, in an international joint venture company, legal disputes are difficult to avoid. A contract makes the venture legally bound and this means that every decision should follow the law (Ben et al., 2002). It is thus important for companies to seek legal counsel before deciding to form an international joint venture agreement. Additionally, the frequent occurrence of legal disputes requires a company to maintain a qualified legal counsel on a foreign country to solve any legal issues that may occur (Beamish and Lupton, 2009). In strategic alliance, there are few legal disputes as a result of its informal nature. Situation that would Favour Strategic Alliance According to transaction theory, the ultimate decision made by an organisation with regard to the mode of transaction is subject to the minimization of the production as well as the transaction costs (Zhao et al., 2004). Parties often select the favourable option from a spectrum of “market and hierarchy” that is able to minimize these costs. Hierarchy in this scenario denote actors internalizing functions and market and hierarchy are polar opposites. Strategic alliances are seen as entity in between the spectrum. In order to understand application of transaction cost in strategic alliances formation, it is paramount to recognize the occurrence of transaction costs in situations that favour strategic alliance (Zhao et al., 2004). One situation that favours the formation of strategic alliance is where there are narrow markets. In this situation, companies must rely on specific supplier for particular products or services and must show high commitment as a result of high switching cost. Such a situation is referred to as asset specificity since assets are high specific which result to high transaction costs (Zhao et al., 2004). Strategic alliances based on distribution agreements can lead to the same situation since a number of industries are linked to high economies of scale which means fewer potential suppliers (Rammer and Schiemiele, 2008). In addition, strategic alliance may be favour by the trade of knowledge. The trade of knowledge is influenced by transaction cost since the purchasing company is uncertain about the nature and extend of the knowledge (Rammer and Schiemiele, 2008). Such situations require partners to depend on each other and they may be forced to have a written agreement for protection against opportunism or cheating. However, due to unpredictability of the environment, contracts between parties are often incomplete and open. (Stuart, 2000) argues that it is the uncertainty and ambiguity of performance of the parties that is the foundation for selecting strategic alliances. According to (Zhao et al., 2004), companies agree to share ownership in order to reduce both transaction cost and management cost. Sharing ownership may also be in the form of acquisition but this could mean entering unknown business. Strategic alliance means avoiding increased production cost. Therefore, it can be favoured where there is cross-sharing of common products and plant. Cross-sharing of common products and plant are done in order to reduce production cost. Forming strategic alliance ensures that risks and costs are shared between partners (Luo and Tung, 2007). Strategic alliance ensures companies take strategic advantage of their strengths; manufacturing capabilities, intellectual capital and market penetration among others. Companies that are cross-sharing products and plants can benefit from a strategic alliance based on a contractual basis while still maintaining and retaining their control (Rammer and Schiemiele, 2008). In addition, according to transaction cost model, it is relevant to use strategic alliances for internationalization in situations with medium asset specificity that is a situation with limited need for control (Zhao et al., 2004). Organisations that face high environmental uncertainty need to have strategic flexibility and should use strategic alliance in accessing new market. Following this reasoning, situations that involves a supplier and a purchaser requires a strategic alliance. An example of a strategic alliance is partnership between McDonald’s and Coca-Cola. This took place when McDonald’s established the first outlets in Des Plaines and required a constant beverage supplier to the restaurants (Cullen and Parboteeah, 2010). It is clear that strategic alliance between Coca-Cola and McDonald’s yielded a long term business relationship that has assisted in creating better brand recognition, has provided higher revenue, has expanded the market share and has exploited economies of scale through sharing of resources. Without each other, the two companies would not be where they are today (Cullen and Parboteeah, 2010). Coca-Cola has assisted McDonald’s in product development which has led to their brand recognition. McDonald has assisted Coca-Cola in revenue generation since it saved a lot of capital otherwise used for vertical integration (Cullen and Parboteeah, 2010). Situation that would Favour Joint Venture There are huge differences in situations in which international joint venture are instituted. As such, their success is highly context-specific. According to resource-based view, resources play a fundamental role in success of organisations (Westhead, Wright and Ucbasaran, 2001). Companies with strong resources capability often have high competitive advantage. There are four elements that determine whether resources can result to sustainable competitive advantage; value, durability, imitability and rarity (Westhead, Wright and Ucbasaran, 2001). Having resources with these four elements is very difficult since companies find themselves lacking either one or two crucial resources characteristics. As competition intensifies internationally, the cost of competing tend to go up and companies find themselves lacking relevant resources to compete effectively (Westhead, Wright and Ucbasaran, 2001). Obtaining relevant resources in the market is not an easy task. In search of resources, companies may decide to reach out to other firms either by strategic alliance or international joint venture. International joint venture can result to rigid structures when organisations pursue complementary resources (Westhead, Wright and Ucbasaran, 2001). International joint venture may be favoured where the operation is likely to involve local manufacture of high technology products. High technology products tend to expensive to produce and distribute (Zahra, Ireland and Hitt, 2000). With such products, there is often behavioural uncertainty that result from opportunism risks. With such issues, there is often need for expensive safety measures and control mechanisms. In this situation, the unlimited control by an international joint venture results to increase in efficiency (Zahra, Ireland and Hitt, 2000). In addition, another situation that favours joint venture over strategic alliance is government regulation (Vaidya, 2009). In entering and choosing entry strategies, organisations need to consider government regulations. Government regulations may put pressure on entry modes. For instance, in countries like China and Mexico, strategies such as direct export and strategic alliances are faced with strict regulatory laws (Vaidya, 2009). Therefore, companies opt for alternatives such as international joint venture. The nature of the competitive environment in the local market is another factor influencing the choice between joint venture and strategic alliance (Vaidya, 2009). For instance, the dominance of Kellogg Co. in the ready-to-eat cereal market led to the formation of a joint venture between Nestle and General Mills. This collaboration led to the gain of market share (Vaidya, 2009). Conclusion In order to enter into new markets, firms require entry strategies such as exporting, licencing, direct investments and mergers and acquisition. The two most utilized internationalization entry strategies are strategic alliance and international joint venture. The differences between the two is that international joint venture involves collaboration between two or more partners with an aim of exchanging resources, divide profits and risks in which there is a formation of new entity. Strategic alliance does not involve the formation of a new business. The advantages of strategic alliances include easy setting up, quicker results, less up-front investment and high flexibility. The disadvantages include emergence of serious dispute, loss of focus among the senior executive among others. On the other hand, establishment of international joint venture is beneficial since it has a clear purpose which increases opportunity for success and parties are highly committed to the operations. However, JVC suffer from cultural issues in the foreign market, relocation costs, management difficulties and high initial investment. Different situations and circumstances require different entry strategies. One situation that makes international joint venture favourable is where the operation involves local manufacture of high technology products. Government restrictions may also favour IJV. Cross-sharing of common products may be attained successfully through the use of strategic alliance. References Akmal, S and. Ghauri, P 2000, Managing International Joint Venture Relationships. Industrial Marketing Management, 29(3), pp. 205–18. Bamford, J., Ernst, D. and Fubini, G 2004, Launching a World-Class Joint Venture. Harvard Business Review, 82(2), pp. 90–101. Beamish, P.W & Lupton, N 2009, Managing joint ventures. Academy of management perspectives, May 2009, p. 75-94 Ben, D., David, J & Arthur, H 2002, International M&A, Joint Ventures, and Beyond: Doing the Deal, London, Wiley. Berrell, M., Gloet, M & Wright, P 2002, Organisational learning in international joint ventures, implications for management development. Journal of Management Development, Vol. 22, No. 2, p.83-100. Chetty, S & Campbell, C 2003, Paths to internationalisation among small-to medium-sized firms: a global versus regional approach. European Journal of Marketing, 37(5/6), 796-820. Chi, T and McGuire, D 2006, Collaborative ventures and value of learning: integrating the transaction cost and strategic option perspectives of the choice of market entry modes, Journal of International Business Studies, Vol. 27, No. 2, pp. 285-307. Cullen, J. B & Parboteeah, K 2010, International Business, Strategy and the Multinational Company, New York, Routledge. Das, T 2011, Strategic alliances in a globalizing world, Charlotte, N.C: Information Age Pub. Ferraro, G 2010, The cultural dimension of international business, Upper Saddle River, NJ: Pearson. Gomes, E., Weber, Y., Brown, C and Tarba, Y 2011, Mergers, Acquisitions and Strategic Alliances; Understanding the Process, Palgrave Macmillan. Hill, Charles W.L 2007, International Business: Competing in the Global Marketplace, London, McGraw-Hill/​Irwin. Kale, P and Singh, H 2009, Managing Strategic Alliances: What Do We Know Now, and Where Do We Go From Here? Perspectives, Academy of Management, p. 45-61. Kumar, V and Singh, N 2008, Internationalization and performance of Indian pharmaceutical firms. Thunderbird International Business Review, 50(5), 321-330. Luo, Y and Tung, R 2007, International expansion of emerging market enterprises: A springboard perspective. Journal of International Business Studies, 38(4), 481-498. McDougall, P., Oviatt, B & Shrader, R 2003, A comparison of international and domestic new ventures. Journal of International Entrepreneurship, 1(1), 59-82. Meirovich, G 2010, The Impact of Cultural Similarities and Differences on Performance in Strategic Partnerships: An Integrative Perspective. Journal of Management and Organization. Vol. 16, No. 1, pp. 127-139. Prescott, Darrell and Salli A. Swartz. 2010, Joint Ventures in the International Arena, Second Edition, ABA Section of International Law, American Bar Association. Rammer, C & Schiemiele, A 2008, Drivers and effects of internationalizing innovation by SMEs, Discussion paper No. 08 – 035. Stuart, E 2000, Interorganizational alliances and the performance of firms: A study of growth and innovation rates in a high-technology industry. Strategic Management Journal, 21(8), pp.. 791-811 Tian, X 2007, Managing International Business in China, Business and Economics, Cambridge University Press. Vaidya, S 2009, International Joint Ventures: an Integrated Framework. Competitiveness Review: An International Business Journal. Vol. 19, no. 1, pp. 8-16. Westhead, P., Wright, M & Ucbasaran, D 2001, The internationalization of new firms: A resource-based view. Journal of Business Venturing, 16(4), pp. 333-358. Zahra, SA, Ireland, RD & Hitt, M 2000, International expansion by new venture firms: international diversity, mode of market entry, technological learning and performance. Academy of Management Journal, 43(5), 925–950. Zhao, Hongxin I., Yadong, L and Taewon, S 2004, Transaction Cost Determinants and Ownership-Based Entry Mode Choice: A Meta-Analytical Review. Journal of International Business Studies, 35(6), pp. 524–44. Read More